Global Sector Views: Navigating a Geopolitical-Driven Market

 In Market and Investment Insights

Director of Research Carmel Wellso explains how staying focused on company fundamentals can help investors cope with uncertainty caused by geopolitical tensions and an aging business cycle.

Key Takeaways

  • In our opinion, geopolitics has created volatility for equity markets as the combination of escalating trade tensions, tech wars, elections and Brexit could slow global economic growth.
  • Against this backdrop, we believe it is more important than ever to take an active investment approach and focus on companies with secular growth drivers.
  • However, we also think long-term growth opportunities exist throughout the market, even among traditionally cyclical sectors.

After a brief reprieve, volatility has returned to equity markets. This time, the Federal Reserve (Fed) – which in recent months said it would end monetary tightening and even consider easing – does not appear to be the primary culprit. Rather, an escalation of trade tensions is more likely to blame, beginning with President Trump’s decision in May to raise tariffs on $200 billion worth of Chinese goods and place Chinese telecom giant Huawei on a trade blacklist.

But trade is only one part of the geopolitical story. In the months ahead, investors will have to continue digesting news around Brexit, the fallout of European Union elections and the 2020 U.S. presidential campaign. Each has the potential to create unwelcome uncertainty for consumers and businesses, which in turn could crimp global economic growth.

Already, we are seeing some signs of softening. New orders of capital goods, excluding defense and aircraft, declined 0.9% in April from the month prior. Shipments were flat for the same period, and in May, the Institute of Supply Management’s Purchasing Managers’ Index (PMI) came in at 52.1%, still in expansionary territory but down from an average of 56.7% over the past 12 months. And while the Morgan Stanley Composite Capex Plans Index saw a 2.2-point gain in May, suggesting some continued optimism by businesses, the results were calculated before Trump threatened tariffs on Mexico and demonstrated his willingness to expand trade disputes.

Early Signs of a Slowdown: New Orders and Shipments of Capital Goods Have Started to Ease

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Source: U.S. Census Bureau and Bloomberg, as of 4/30/19. Data exclude defense and aircraft spending.

Staying Focused on Fundamentals

Against this backdrop, we believe cyclical equities – stocks whose prices tend to be closely tied to economic expansion and contraction – could face challenges. Even if trade resolutions are reached, we are in the later stages of the business cycle, a time when economic activity naturally ebbs.

Consequently, investors might be tempted to shy away from traditionally cyclical sectors, such as financials, consumer discretionary, technology and industrials. However, as we discuss in the latest Global Sector Views, we think a better approach is to focus on secular growth stories that are likely to persist regardless of where we are in the economic cycle. Through that lens, we believe compelling, long-term growth opportunities can be found throughout the market’s sectors. In technology, for example, the transition to cloud computing persists, driving steady demand for providers of Software as a Service (SaaS) and cloud platforms. In industrials, innovation continues with machine vision systems, which are increasingly being used in logistics and manufacturing. From our experience, such fundamentals are more pertinent to long-term returns than the geopolitical worries du jour.

Read our analysts’ perspectives on equity markets in our quarterly outlook.

The opinions and views expressed are as of the date published and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

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